Economics » Money and Banking » Measuring Money: Currency, M1, and M2

Key Concepts and Summary

Key Concepts and Summary

Money is measured with several definitions: M1 includes currency and money in checking accounts (demand deposits). Traveler’s checks are also a component of M1, but are declining in use. M2 includes all of M1, plus savings deposits, time deposits like certificates of deposit, and money market funds.


coins and currency in circulation

the coins and bills that circulate in an economy that are not held by the U.S Treasury, at the Federal Reserve Bank, or in bank vaults

credit card

immediately transfers money from the credit card company’s checking account to the seller, and at the end of the month the user owes the money to the credit card company; a credit card is a short-term loan

debit card

like a check, is an instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller

demand deposit

checkable deposit in banks that is available by making a cash withdrawal or writing a check

M1 money supply

a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler’s checks.

M2 money supply

a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit

money market fund

the deposits of many investors are pooled together and invested in a safe way like short-term government bonds

savings deposit

bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank—or can transfer it easily to a checking account

smart card

stores a certain value of money on a card and then the card can be used to make purchases

time deposit

account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest; also called certificate of deposit

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